California’s Homeowners’ Insurance is Changing

The landscape for homeowners’ insurance in California has been treacherous recently. Many major insurers, including State Farm, Allstate, Farmers Insurance, and United Services Automobile Association, stopped writing new policies because of wildfire exposure. Homeowners have had to turn to the State’s Fair Access to Insurance Requirements (FAIR) plan for high-risk properties. FAIR plans provide only basic coverage for property damage due to fire, lightning, smoke, or internal explosions. To obtain the equivalent of comprehensive homeowners’ insurance, policyholders also have to purchase a Difference in Conditions (DIC) policy, which provides coverage for losses like water damage, theft, and liability.

In September 2023 California announced a new plan to shore up the home insurance market. In return for being allowed to use forward-looking modeling when setting rates, insurers will have to write no less than 85% of their market share in “wildfire-distressed” areas. The intent of the new regulations is to stabilize the markets and keep the FAIR plan solvent.

How to Find Your Home’s Risk Score

The risk score for your home is available at Riskfactor.com. Type in your property address.

What Determines Your Rate for Homeowners’ Insurance in California?

In California, insurers calculate rates based on 10 factors:

1. The location of your home.
2. The size of your home.
3. The condition of your home.
4. Whether the home is financed or owned outright.
5. Your level of coverage.
6. Your deductible.
7. Previous homeowners’ insurance claims.
8. The cost of materials and construction.
9. Additional risks on your property.
10. Future risk modeling.

It’s important to keep in mind that your home’s location plays a large role in the calculation of premiums. In setting your rate, insurance companies rely on these factors:

• Your “insurance protection class” ranging from 1 (best) to 10 (worst). This class is based on your distance to a water source, how quickly the nearest fire department can respond in the event of a fire, and what equipment they have.
• Your home’s risk score, based on factors such as fuel, lot slope, access, aspect, structural characteristics, and wind vulnerability.

The insurer must provide to the policyholder or applicant, in writing, their wildfire risk score or classification no later than 15 days after an application is submitted, 45 days prior to any renewal, 75 days prior to any nonrenewal, or following a mitigation measure by the policyholder and a request for reconsideration, within 30 days of receiving that request.

Policyholders and applicants are entitled to appeal the rate assessed and the procedures used to make that assessment. The insurer must acknowledge receipt of the appeal within 10 calendar days and make a decision within 30 days.

Insure Your Home for Actual Cash Value or Replacement Cost?

Typically, homeowners can insure their home and personal property either on an Actual Cash Value basis or a Replacement Cost.

Actual Cash Value refers to the amount needed to repair or replace an item, minus depreciation (the decrease in the value of your home or personal property due to normal wear and tear).

Replacement Cost refers to the amount needed to repair or replace your damaged property with materials of similar kind and quality without deducting for depreciation. With this type of policy, it is critical that homeowners have replacement cost coverage worth at least 80% of their home’s total replacement cost to receive full coverage from their insurance company. This rule is designed to prevent underinsurance and ensure that homeowners can rebuild their homes after a loss without suffering significant financial hardship.

How You Can Save on Insurance Costs

• Shop around and discuss options with an insurance broker. We recommend using a broker, as some insurers are only available through these agents.
• Consider extending coverage for items that could save you money in the event of a claim, for example, debris removal.
• Review your policy yearly for changes in coverage.
• Make your home fire resistant. Recent Safer from Wildfire regulations allow discounts for property owners who can show proof of mitigation measures on their property. These include defensible space measures, such as clearing vegetation and debris around the property, and building hardening measures, including Class-A fire rated roof, enclosed eaves, fire-resistant eaves, multipaned windows, and at least six inches of noncombustible vertical clearance at the bottom of the exterior surface of the building.
• Install a security system.
• Increase your deductible.
• Eliminate high dollar limits on contents.
• Know your rebuilding cost.
• Know your risk score.

Another Way to Reduce the Cost of Homeowner’s Insurance

You may reduce the cost of your homeowner’s insurance by using a “non-admitted” insurance carrier rather than an admitted carrier. This may not be a bad choice. Here is a summary of the differences. It is best to check with your insurance broker on this option.

Admitted versus Non-Admitted Insurance Companies

An admitted carrier in California is an insurance company that has been approved by the California Department of Insurance (DOI) and is therefore subject to all state regulations and cannot deviate from its filed rates.

• With an admitted carrier, you don’t pay certain fees and taxes when purchasing a policy; if the company fails, the California Insurance Guarantee Association (CIGA) will take care of your payments; and you can appeal decisions you think are unfair to the DOI.
• A non-admitted carrier has not been approved by the DOI and therefore it is not obligated to comply with any state insurance regulations. You will have to pay a “surplus lines tax” and “stamping fee” on your policy (which is usually around 4% or less of the policy premium) and sometimes an inspection fee. If the insurance company becomes financially insolvent, there is no guarantee your claims will be paid; and if you think your case was handled improperly, you cannot appeal to the state insurance department.
• Non-admitted carriers may have more flexibility with both policy terms and pricing.
• You can find out a particular insurer’s rating through A.M. Best, a company that’s been rating insurance companies since 1906. A non-admitted company with an A+ rating may be a more attractive choice than an admitted carrier with a C rating.

What You Can do if Your Homeowners’ Policy is Not Renewed

Insurers have the right not to renew your homeowner’s policy. You can take steps to reverse this decision:

• If the insurer decides not to renew, it must send you a written notice of nonrenewal at least 75 days before the policy’s expiration date. If the company fails to give you the proper notice as required by law, your existing policy, with no change in its terms and conditions, will remain in effect for 75 days from the date the notice is sent.
• While reversing a non-renewal is unlikely, it is always advisable to contact your insurance company to discuss; it’s possible that they have incorrect information.
• California consumer protection law requires a mandatory one-year moratorium on insurance companies cancelling or non-renewing residential insurance policies in certain areas within or adjacent to a fire perimeter after a declared state of emergency is issued by the Governor.